Newsweek, April 5, 1999

Brawling for Beauty

The owners of some of the world's best-known luxury brands are waging a fierce takeover battle

By Dana Thomas and Rana Dogar

Gucci's head designer, Tom Ford, has never been afraid to mix sex with pain. Consider the red patent-leather pumps with five-inch, steel-spike heels that he designed in 1997. But Ford's fall-winter 2000 collection, which debuted in Milan a few weeks ago, went beyond S&M into battle gear. Models in thigh-high anaconda-skin boots, fox bomber jackets and polished-leather breastplates marched ferociously down the catwalk, their pouts replaced with sneers. The clothing screamed war. And Gucci is waging a fierce one as the red-hot Florentine fashion house tries to fend off the sort of Wall Street-style takeover that's becoming increasingly common in the new unified Europe.

The battle, launched by French luxury conglomerate LVMH Moët Hennessy Louis Vuitton, has raged for more than two months. But last week the exchange of fire between Gucci CEO Dominique De Sole and

LVMH chairman Bernard Arnault could be heard from Avenue Montaigne to Seventh Avenue. Back in January, Arnault, whose company owns high-fashion brands like Givenchy, Louis Vuitton and Lacroix, spent $1.4 billion to buy 34.4 percent of Gucci, which went from being a nearly bankrupt leather maker to one of fashion's most successful names after Ford became head designer in 1994. For Arnault, it was a great deal: he would have significant control of a $1 billion-in-sales company that makes clothes worn by Madonna and Gwyneth Paltrow. The problem was, neither De Sole nor Ford wanted anything to do with Arnault, who is known for buying up companies and running them with an iron fist. De Sole tried to ward off Arnault's "creeping takeover" by creating an employee stock-ownership plan, which diluted LVMH's holdings to 26 percent. Arnault cried foul, and both parties wound up in a Dutch court (Gucci is registered as a Dutch company), where they were ordered to settle their differences.

On March 19, De Sole announced that he had found a white knight. Pinault-Printemps-Redoute (PPR)-a French company with holdings like Converse, Samsonite, Christie's auction house and French department-store chain Le Printemps-had invested $2.9 billion in Gucci. Together they would create Gucci Group, a conglomerate that would do exactly what LVMH does-acquire and develop luxury brands. The deal gave PPR 40 percent of Gucci; LVMH's share shrank to 22 percent. It also gave Arnault a formidable new rival, PPR chairman François Pinault, France's richest man. De Sole and Ford were gleeful. "This is one of my dreams come true," said Ford. He also pointed out that the Gucci Group could go head to head with LVMH in acquiring family-held fashion houses, like Versace and Armani.

Arnault responded by doing something he claimed he never would. The same day Gucci announced its partnership with Pinault, LVMH made a full takeover bid for the company at $81 a share, $6 more than what Pinault had paid. He also took Gucci to court again, this time to annul the deal with PPR and replace Gucci's board with an independent overseer.

Arnault's willingness to wage the sort of highly publicized, brass-knuckled takeover battle formerly anathema to European executives has a lot to do with the U.S. market. Until recently, women in Asia spent enough on Vuitton knapsacks and Lady Dior bags to keep LVMH's coffers full. From 1996 to 1997, worldwide sales grew 54 percent, to more than $8 billion. But the Asian financial crisis changed all that. Suddenly, LVMH and other high-end fashion companies had to look west to the American market, where spending on luxury goods is growing four times as fast as overall spending. LVMH's flamboyant couture creations have never been huge hits in the States (even socialites are reluctant to cough up thousands for Lacroix's gauze Gypsy costumes). Gucci's styles are also priced in the stratosphere, but their sleek, urban edge is more popular with America's couture wearers. Gucci's feathered jeans and beaded skirts have been spotted recently on celebrities like Elisabeth Shue and Lauryn Hill. What's more, the company's sales were up 10 percent from 1997 to 1998. Arnault knew that Gucci could help heat up the U.S. market for LVMH.

But Gucci is only part of the plan. Over the past year, Arnault installed a trio of bright young American designers to spice up three old LVMH companies: Marc Jacobs at Louis Vuitton, Narciso Rodriguez (maker of Carolyn Bessette-Kennedy's wedding gown) at Loewe and Michael Kors at Celine. So far, so good. The first U.S. Louis Vuitton store opened in New York last fall, the buzz on Jacobs's collections is strong and a second store is set to open in Beverly Hills in October. Celine's eight U.S. boutiques are flourishing, and Vogue has put Celine on the cover twice since June.

Arnault has also learned the golden rule of American retailing: entertain the customer. He's creating "attraction centers" in Waikiki and Guam, where LVMH products will be showcased next to giant aquariums full of sharks. He's building a new 23-story U.S. headquarters in New York. "People will come to see it," he raves, "like the Empire State building!" He's even hired Pia Getty-one of the famed, blond, well-married Miller sisters-to promote his 14 new Sephora cosmetics stores in the United States. The SoHo outlet in New York is already packed with locals whose perfect blowouts resemble Getty's own coif.

But Arnault may have competition from PPR on the beauty, as well as the fashion, front. The same day PPR announced its deal with Gucci, it paid $1 billion for Sanofi Beaute, the French owner of brands like Yves Saint Laurent cosmetics and perfumes. Sanofi makes Opium, a perpetual favorite at the fragrance counter. What makes the purchase so galling to Arnault is that he had tried to buy the company himself back in December, but gave up after weeks of haggling. He was expected to put in another bid, until PPR snatched Sanofi out from under him. Arnault dismissed the purchase, saying PPR had overpaid. But the Sanofi deal only adds to the competitive pressure posed by PPR's offer to Gucci.

Dominique De Sole believes that pressure is the only reason Arnault made a full offer for Gucci, rather than continue his creeping takeover. "Arnault is defending his monopoly," De Sole tells NEWSWEEK. "He is the only big luxury group in the industry actively buying companies. The Gucci Group would be a competitor." In many ways, Bernard Arnault and Francois Pinault are cut from the same cloth. Both are highly competitive and have an entrepreneurial bent. Arnault worked in the cut-throat U.S. property-development business in the 1980s before building his empire. Pinault dropped out of high school at 16, and later turned his family's single lumber mill into a multimillion-dollar lumber-distribution network. His business strategy, inspired by French poet Rene Char, is one that Arnault could probably relate to: "Think strategically, act primitively."

For the time being, Pinault will have to keep his primitive urges in check. Last week a Dutch court ruled that Gucci must consider LVMH's takeover deal without interference from PPR. But it refused to appoint an independent overseer for the board. The court also upheld PPR's stake in Gucci. Both sides claimed victory. Arnault says he's pleased Gucci has been forced to talk with LVMH. De Sole seems happy that he and Pinault were able to back LVMH into a corner: "Arnault said he would never make an offer for the entire company, and now has an offer on the table." He adds that from here on out, "it really depends on what the shareholders want, if they want to cash in [by selling to LVMH] or participate in the growth of the company [by accepting the PPR merger]."

Shareholders will make that decision in the coming weeks, and on April 22 a court will rule on whether Gucci's stock plan is legal. Meanwhile, the sniping between Gucci and LVMH continues. The battle certainly hasn't been bad for Gucci's business: the company's stock has risen more than 20 percent since its close on March 18, the day before the PPR deal was announced. Whether it will stay up if LVMH gets the company is another story. Tom Ford and Dominique De Sole made Gucci what it is, and if Arnault succeeds in his takeover, they have both promised to leave the company. If so, Arnault may trade the sex appeal of the world's hottest fashion house for the pain it cost him to get it.